Since March 2020, we’ve posted regular updates on the commercial loan pricing markets, based on what we’ve seen when examining the PrecisionLender dataset. We look at several popular metrics and point out areas in which there have been noteworthy changes.
Today’s analysis is for the second half of February 2021. The big story was the significant drop in fixed-rate spreads. If you’d like to see our previous loan pricing market updates, you can find them here.
If you have questions about metrics that have appeared in previous posts, but not this latest one, please reach out to us at email@example.com.
NOTE: PrecisionLender’s data reflects actual commercial opportunities priced (loans, deposits, and other fee-based business) by more than 150 banks in the United States, ranging in size from small community banks to top 10 U.S. institutions. In addition to their variance in size, these banks are also geographically diverse, with borrowers in all 50 states.
February Pricing Volume Stays Strong
February’s pricing volume was the strongest during this recent period of measurement and comparison, indexing against July 2020 – when the market appeared to settle after the upheaval and transition in Spring 2020. This is the first month that has eclipsed the July index and it’s well above the monthly average for the past eight months. (The orange horizontal line in the chart below)
Priced Commercial Loan Volume, by Month
Indexed to July 2020 = 100
Funding Curves Steepen
The 3-Month LIBOR Swap curve has been steepening in 2021, with separation occurring at the 36-month mark. The Feb. 26 snapshot is 28 bps higher than the Dec. 30 snapshot, with the gap growing to 51 bps at the 120-month mark.
How would this funding cost increase impact the coupon rate for fixed-rate loans? More on that in a bit.
3-Month LIBOR Swap Curve, Selected Dates
COF Rising for Fixed-Rate Loans, Steady for Floating-Rate
As expected, the aforementioned changes in the 3-Month LIBOR Swap Curve are also seen in the COF trends for fixed- and floating-rate loans. Fixed-rate funding costs have risen steadily, increasing by 26 basis points since September of 2020. Meanwhile, floating-rate costs have moved in a narrow 8-basis point range for 1-Month LIBOR-based loans and a 10-basis point range for Prime-based loans.
As a reminder: PrecisionLender uses an assumed marginal funding cost, not the bank’s actual average cost of funds.
COF by Month, Rolling Trend
Fixed- and Floating-Rate Coupons Head in Opposite Directions
That increase in fixed-rate funding costs would normally lead to upward pressure on coupon rates for loans. Instead, fixed-rate coupons dropped by 11 bps in the second half of February. The impact on spreads was significant and will be detailed later.
Meanwhile, floating rate coupons moved up, 9 basis points each for Prime-based and 1-month LIBOR-based loans.
Coupon Rate by Month, Rolling Trend
Fixed-Rate Spreads Drop Significantly
The combination of rising funding costs and lower coupon rates led to a significant drop in fixed-rate spreads. They fell 30 basis points in comparison to levels in the first half of February.
That’s a significant shift, but it should be noted that market rate changes may be more rapid than actual bank COF changes. And as we mentioned previously, PrecisionLender uses an assumed marginal funding cost, not the bank’s actual average cost of funds. Anecdotally we’ve had several bankers tell us that – with high levels of liquidity on hand at their institutions, they’re assuming a much lower COF than what is shown in the chart above.
We’ll keep monitoring these fluctuations closely.
Fixed-Rate Spread Trend
Floating-Rate Spreads Rebound
After dipping in the first half of February, floating-rate spreads moved back up, 9 bps each for the spread to 1-Month LIBOR and the spread to Prime. Worth noting: As mentioned previously, the underlying COF for both indices has been essentially unchanged since September. This indicates that spread remains a sensitive negotiation point during pricing conversations. Bankers have generally protected these spread levels during the pandemic – they’re up ~25 bps since February 2020.
Weighted Average Spread to 1-Month LIBOR
Weighted Average Spread to Prime
Fixed-Rate Margins Narrow Significantly
In sum - given the decrease in coupon, narrowed spreads, and increased cost of funds - fixed-rate NIM plunged during this reporting period, down 19 bps, to 2.45%.
This drop in fixed-rate NIM, when paired with increases in floating-rate NIM widened the gap between 1-month LIBOR NIM and fixed-rate NIM. It increased to 31 bps after having shrunk to 9 bps earlier in February. That shift also parallels changes in the rate type mix, with fixed-rate deal incidence rising from 39% to 43% in this period, as LIBOR-based floating-rate deal incidence fell from 26% to 21%.
NIM by Month, Rolling Trend
Spreads Increase When Floors Are Implemented
During 2020, we periodically reported on interest rate floors – how often they’re being used and where those rates are being set. We continue to hear from bankers on the importance of including a floor on floating rate loans.
So far in 2021, floors are present on about 35% Libor loans, a level of incidence that’s been pretty consistent since June of last year. Meanwhile, the median floor rate is approximately 3.25%, the same level it’s been since December 2020.
We continue to see in our data that, in addition to getting added protection, bankers that included rate floors also attained higher spreads to the index on these loans.
Floating Rate 1-Month LIBOR, Spread to Index Trend
Our banking consultants and data scientists are combing through PrecisionLender pricing data every day. If there is anything you’d like to know about what they’re seeing, please send along your questions to firstname.lastname@example.org.